My Trading Methodology

[aiki14]

I have been asked by the Moderator to write an article that describes my trading psychology and methodology. Of course I said I would because it's an honor to do so.
I'll try to split the answer in the way the question was split because I do believe one should trade according to his own personality.

So if I were to do a psychological self assay I would say I am a risk taker by nature, I tend to have a martial philosophy by which I mean I look at things as black and white, win or lose. I am a maniac for puzzle solving, and I have an algorithmic approach to everything. The things that influence me most are 35 years in martial arts with black belts in Jiu Jitsu (Kokushi Ryu form) and Aikido (traditional form) and my training and experience as a paramedic.

I prefer to trade over the short time frame which I define as 1 or 2 day to 1 or 2 week holds, in positions I have extensively researched. However having said this I will make technical trades if I believe the situation warrants it. I believe the things that make me successful at this are Discipline and Hard Work (I capitalized the terms because they deserve it).
I'll address the second first. Hard Work as I define it is researching every position in as detailed a manner as possible. Discipline is having a standard that must be met before entry, and an exit point in mind before any trade. Discipline is not a rigid inflexible thing, one must adapt to the rapidly evolving market conditions, discipline is structure to build upon.

So if I am entering a trade based on a set of fundamental criteria, I try to do a near proctological exam of the company. I listen to conference calls, find out where the execs are from, drill down into financials, get any available analysis from independent agencies, and search for any news that might be relevant. Then I analyze market conditions on an industry, sector, and whole market level to determine a general entry point. Then I do a technical analysis to confirm or adjust my entry and exit points.
Generally on trades of my time frame I am limiting my loss to 6-8% and looking for 10% gains. This can be adjusted according to the level of directional confidence I have, the price of the stock and it's Beta. I set trailing stops after 5% moves.
I then re-evaluate my positions every day, and essentially consider the next day to be new positions. I will nearly always reduce my positions when the upside criteria for the original trade are met, but I may still hold a position in the stock. After I exit a losing position I take a postmortem on the trade and try to be as hard on myself as possible, and determine where I went wrong.
I believe one of the biggest traps traders can fall into is being too kind to themselves on winners and too easy on losers. If you're on the winning side you're not a genius, and if you're on the losing side it wasn't someone else's fault. It may be the case but if you're not honest with yourself you may be setting yourself up for taking big chances and getting hammered.

Then there are technical trades, based entirely or nearly entirely on technical indicators. I am more comfortable going short on these than long because I tend to be more confident in downside indicators than upside. I won't debate others who disagree here, to each his own, but I believe in gravity and the concept of retracement towards the mean.
I screen for unusual price and volume movement, and subscribe to services that do this for me intraday. If I see a stock that has gone up rapidly by around 12 noon and the volume appears to be petering out, I'll take a short position. I tend to feed into these positions a bit at a time to get the best risk reward scenario and prevent big losses.
I'll look for breaks out of trend in either direction for quick trades, and again feed into the positions.
One thing I really believe in is that news trumps technical analysis. If a pharma company discovers the next viagra and the stock jumps, I am not going to short that one. If a company's execs are spotted getting on a plane bound for guatemala with suitcases full of cash and a bunch of hookers, I am not going to play the bounce.

I also believe in stepping back and taking time off if things get dicey. Three or four days of bad plays may be a streak of bad luck, or your mindset may be sub optimal. Go play golf, go to the beach, take a few days off. This is a very stressful game, it can hurt you, psychologically. Have plans in place to step back and relax. I have never regretted doing that, and you won't either.

I haven't addressed risk versus reward, or options strategies in this but I believe you can get a general idea of my technique.

Well, I hope this is of some value to you, and I look forward to any opinions you may have about what I have said. Positive or negative.

[Luvnrio]

aiki, I now understand why you only trade 150 days per year, getting a company to bend over a cough, that my friend could take some time.. Just kiddn... Also, I've seen some these execs with their bags of cash and they're here in RJ and as far as the hookers go, they're already here and a lot less expensive. So I've been told...

All in all, great incite into the world of aiki. Thanks, this is one of the reasons I enjoy this site. I always take away a little sumpin sumpin..

Rio

[doji]

Originally Posted by aiki14

Generally on trades of my time frame I am limiting my loss to 6-8% and looking for 10% gains. This can be adjusted according to the level of directional confidence I have, the price of the stock and it's Beta. I set trailing stops after 5% moves.

I'm assuming you mean 6-8% on the trade. how much of your trading capital are you willing to risk per trade though. Also, isn't risking 6-8% to make 10% a little "too risky"? thanks

[aiki14]

Originally Posted by doji

I'm assuming you mean 6-8% on the trade. how much of your trading capital are you willing to risk per trade though. Also, isn't risking 6-8% to make 10% a little "too risky"? thanks

Yes, 6-8% on the trade. I generally trade between 4 and 8 positions, and try to keep each between 10 and 20% of my trading capital.
As to risking 6-8 to get 10 being a little too risky, I don't think so, but I am not completely rigid with those numbers. I am pretty rigid when it comes to downside, so that is what I am willing to risk, I'll re-evaluate the position at 10% and let it run or take some off the table as I see fit. It seems to work for my style and time frame, I know people who won't play more than 2% of their capital on a position, but they make 10 times the trades I do. That works for them.

[newbie]

thanks for sharing your trading methodology with us. it's a great example of a successful way to approach trading as a business and of great help to novice traders like myself. thanks!

[TapeReader]

interesting read. it's good to read how different traders approach trading and risk.

how long have you been trading, if I may ask? you seem like a pretty knowledgeable guy. do you come from a financial industry background?

[aiki14]

Originally Posted by TapeReader

interesting read. it's good to read how different traders approach trading and risk.

how long have you been trading, if I may ask? you seem like a pretty knowledgeable guy. do you come from a financial industry background?

I have been trading full time (which is whenever I am not traveling) for three years. I was a real estate speculator before that and I do still have some properties that generate income. Prior to 1999 I was a paramedic in NYC. I bought my first spec property in 1990. I have been investing in the market for 30 yrs, since my high school friend worked for Merrill and introduced me to mutual funds. I am still a Merrill Client.
I used and in fact still use the majority of my time educating myself.

[BoneFishGA]

Very interesting read Aiki, thanks for sharing your method.

[egge0126]

As a college student looking to jump into the investing world, thank you for posting this.